Wednesday, September 23, 2015

The trade-offs between networks and mega-cities

Edward Glaeser and Co have a new paper which examines the trade-off between mega-cities (densified cities) and network of smaller cities linked together (by, say transportation and other networks) that enable exchange of goods, people, and ideas. In particular, they examine whether it is good public policy to pursue merging cities to form mega-cities (densification) or form large networks of smaller cities (consolidation)? The paper examines the trade-offs that happen at three levels - returns to scale in ideas creation, connection between urban size and amenities, and elasticities of housing supply - and which may vary across time horizons (short vs long-term), stage of economic development etc. It finds,

Even if there are global increasing returns, the returns to local scale in innovation may be decreasing, and that makes networks more appealing than mega-cities. Inelastic housing supply makes it harder to supply more space in dense confines, which perhaps explains why networks are more popular in regulated Europe than in the American Sunbelt. Larger cities can dominate networks because of amenities, as long as the benefits of scale overwhelm the downsides of density. In our framework, the skilled are more likely to prefer mega-cities than the less skilled, and the long-run benefits of either mega-cities or networks may be quite different from the short-run benefits.

In the authors view, mega-cities score over networks in terms of amenity spill-overs, idea creation (skilled workers prefer densified environments), mobility of less-skilled workers across employers, new enterprises prefer larger markets etc. However, networks have advantages of having more land (eg. the space between network nodes) and more elastic housing supply.

It will be interesting to empirically validate the model in the context of urban development in India. But till then, a few observations

1. It is arguable that more than anything else, supply of affordable housing and large enough public transportation networks are central to the growth prospects of any large metropolitan area.

2. The mega-cities in India are clearly facing a crisis in affordable housing. In the absence of policies that promote vertical development and greater densification, supplemented with investments to improve carrying capacity, cities like Mumbai may be better off pursuing a model involving network of one large core connected to smaller nodes with excellent transportation lines.

But the risk with this is that the larger node generally gentrifies, displacing all but the richest and highest-level government employees to live in the nodes and commute for work. Even for those working in the ideas creating enterprises, housing may have become unaffordable for the vast majority of employees, enough to possibly offset the benefits from densification. Without massive investments in good public transit networks with large carrying capacity, this trend can potentially stifle the economic prospects of such regions.

Of course, one could say that markets would respond by moving out some of the economic activities, especially those requiring larger land and more workers, out from the city center to the suburbs. And it surely is happening. But the value of land, even in the nodes of the largest cities may have become prohibitive enough to more than off-set the possible gains from relocation. Therefore, in any case, the current urban planning models may require radical makeover.

3. In this context, the examples of Paris and Tokyo are instructive. Paris has a small and less dense central core, with the major part of the population located in the banlieue, whereas Tokyo has a very dense core, surrounded by a massive metropolitan area, extending finger-like around the core in all directions with high-density nodes along them. In both cases, the nodes are connected to the core area through excellent public transportation networks that mitigate the typical problems of daily commutes.

In contrast, the largest Indian (and many developing country) cities, have a much larger core and with much higher density than these cities. But given the sheer size of the populations involved and the attraction of economic opportunities in these cities, the suburbs of these cities are rapidly becoming as big as the core itself and with increasing density. Further, these suburbs are emerging more as a continuum to the city and not so much as distinct nodes.

4. A 2014 report by the MGI identified 49 metropolitan growth clusters covering 183 districts across India. It estimates that these clusters would contribute 77% of India's incremental GDP, 72% of consuming-class households, and 73% of its incremental income pool in the 2012-25 period. In terms of economic growth policy making, states should prioritize the long-term development of these areas, with the Government of India stepping in wherever they overlap across states. In terms of the long-term future of the state itself, leadership and policies in these clusters assume far greater significance than the remaining parts of the state.

Outside of the largest metros, the vast majority of these clusters are still a constellation of nodes around a larger (but not mega) city. The potential here are immense. It is still possible to carefully guide the development of these areas through progressive and far-sighted urban planning policies. Strict enforcement of master plans, with limited tolerance for land-use conversions (especially in the smaller nodes), and policies to promotes densification (higher FAR etc) are non-negotiable imperatives. This should be supported with investments in public transportation systems that link the nodes. These systems could be financed through innovative value capture and land monetization strategies.